Czech firms losing their position in German market

Will key German industrial players, such as Volkswagen, need Czech suppliers anymore?

Czech firms losing their position in German market

Czech export firms are losing their position in neighboring Germany. And there seems to be no viable alternative to the Czech Republic’s key trade partner.

In 2010, Germans imported Czech goods worth CZK 30bil (EUR 1.2bil), which was the most decisive reason behind the Czech economic recovery from the 2008/9 slump.

However, the German Statistical Office’s data on the first seven months of 2011 show the expansion of Czech firms have ended. The proportion of Czech goods on the German market stagnates at 3.7 percent.

German importers are gradually losing interest in goods made by traditional producers such as the USA, France, Spain and Japan. Instead, they increasingly buy from new exporters: the BRIC countries, Poland and Turkey. But not from the Czech Republic.

In 2009 and 2010, it seemed that the German car scrappage scheme would catapult the Czech Republic among the top 10 most dynamic exporters to Germany. However, Czech exporters to Germany are currently losing even to much less important producers such as Rumania, Bulgaria and Slovenia.

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The all-important German demand for Czech products cannot be quickly replaced.

This is the key issue because the Czech economy’s is getting more and more export-dependent.

According to experts of the Czech Finance Ministry, the recovery from the 2008/9 recession was driven entirely by foreign direct investment and exports.

In 2010 and this year, foreign importers and investors have added more than 2 percents to the Czech GDP, while domestic consumption has been stagnating or decreasing.
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In addition, the ministry warns that the euro debt crisis will stop the inflow of foreign investment into the country, so next year the economic growth will rely exclusively on the growth of exports.

And even though Germany imports “only” one third of goods produced in the Czech Republic, the growth of Czech exports has been recently driven almost entirely by the German demand.

In the last quarter, the volume of Czech exports increased by CZK 60bil (EUR 2.4bil) – 22bil was imported directly by Germany, and another 16bil by German-owned firms in Slovakia and Poland.

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And the German economy is facing a serious slowdown, as shown for example by the key ZEW economic sentiment index.

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“It has never been so low since November 2008,” warned economists from Mannheim in their press release from October this year.

“One percent decrease of the German economic growth will cause a 0.8 decrease in the Czech Republic,” said Citi Bank analyst Jaromír Šindel.

Ready to go

When in trouble, German companies tend to look for cheaper workforce abroad, which enabled the Czech export-driven boom in the first half of the 1990s.

Now the Czech Republic may suffer from an ebb of German investments.

However, Robert Beňačka from German consultancy ROI International reminded that moving the investments more eastwards would produce additional costs for German investors. That’s why a massive exodus of German companies from the Czech Republic is unlikely to happen in the following 5 years, said the analyst. The scenario would be real only in case of a new, very serious crisis.

Read more: Czech economy has good reasons to fear Greek default
Read more: Czech 2012 GDP growth estimate revised from 2.5 to 1%
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